Dalm v. U.S.

• Decision Date: 08 February 1989
• Docket Number: No. 88-1079,88-1079
• Citation: 867 F.2d 305
• Parties: -1541, 89-1 USTC P 13,807, 89-1 USTC P 9171 Frances L. DALM, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 305

867 F.2d 305

63 A.F.T.R.2d 89-1541, 89-1 USTC P 13,807,

89-1 USTC P 9171

Frances L. DALM, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.

No. 88-1079.

United States Court of Appeals,

Sixth Circuit.

Argued Nov. 10, 1988.

Decided Feb. 8, 1989.

Paul T. Mengel (argued), West Bloomfield, Mich., for plaintiff-appellant.

Agnes Kemper-Cloyd, Asst. U.S. Atty., Grand Rapids, Mich., David S. Grossman, Trial Atty., Tax Div., U.S. Dept. of Justice, Robert A. Bernstein, Thomas R. Lamons (argued), Dept. of Justice, Gary R. Allen, William S. Rose, Jr., Chief, Appellate Section Tax Div., Dept. of Justice, Washington, D.C., for defendant-appellee.

Before NELSON and NORRIS, Circuit Judges; and LIVELY, Senior Circuit Judge. ^*

LIVELY, Senior Circuit Judge.

The doctrine of equitable recoupment holds that when a single transaction or taxable event has been subjected to two taxes on inconsistent legal theories, a taxpayer who meets certain requirements may recover a refund that would be barred otherwise by limitations. Rothensies v. Electric Storage Battery Co., 329 U.S. 296, 299-300, 67 S.Ct. 271, 272-273, 91 L.Ed. 296 (1946). In the present case the district court granted the government's motions to dismiss the complaint and for summary judgment upon concluding that the taxpayer was not entitled to a refund of gift taxes by way of recoupment after the statute of limitations for a refund action had expired.

I.

A.

The historic facts are not in dispute. The taxpayer, Frances Dalm, was appointed administratrix of the estate of Harold Schrier in May 1975. The appointment was made at the request of the sole beneficiary of the estate, Clarence Schrier, brother of the decedent. The estate paid the taxpayer $30,000 in 1976 and $7,000 in 1977 as fees. These payments were approved by the probate court. In addition, Clarence Schrier transferred $180,000 to the taxpayer in 1976 and $133,813 in 1977. Clarence Schrier and his wife filed a gift tax return for 1976, showing the $180,000 payment as a gift to the taxpayer. The taxpayer paid the gift tax of $18,675 and interest and penalties of $1,587. No gift tax return was filed with respect to the 1977 transfer of $133,813.

The IRS audited the taxpayer's 1976 and 1977 income tax returns and mailed a notice of deficiency to her and her husband on June 21, 1983. The IRS determined that the two payments from Clarence Schrier were additional administrator's fees and asserted deficiencies of $96,045 in income tax and penalty for 1976 and $74,171 in income tax and penalty for 1977. The taxpayer challenged the deficiency in the Tax Court. She maintained that the two transfers, aggregating $313,813 and representing one-third of the net estate of Harold Schrier, were a gift from Clarence Schrier. The taxpayer had been an employee of Harold Schrier for many years prior to his death. The Tax Court petition stated that Clarence Schrier made the transfers in order to carry out his brother's intention that the taxpayer share in his estate.

B.

After two days of trial the parties settled the Tax Court case for exactly one-half of the claimed deficiency without penalties. The stipulated decision, entered December 4, 1984, stated that there were deficiencies in income taxes due from the taxpayer in the amount of $10,416 for the taxable year 1976 and $70,639 for 1977. The taxpayer paid these deficiencies with interest and filed a claim for refund for $20,262, the amount of gift tax and penalty paid in December 1976 and March 1977. When the IRS failed to respond to the claim for refund within six months, the taxpayer filed the present action in district court on September 23, 1985.

In her complaint the taxpayer alleged that the Tax Court decision "determined that a portion of the money said gift tax was paid upon was taxable as income" and that it was inequitable for the government "to collect taxes on the same fund on the mutually exclusive theories of said amount of money being both income and a gift." She sought judgment for "overpaid gift taxes" in the amount of $20,262 with interest. After the government answered, the taxpayer filed a motion for summary judgment. The government then filed a cross-motion in the alternative to dismiss the complaint pursuant to Fed.R.Civ.P. 12(b)(6), or for summary judgment, relying specifically upon the three-year statute of limitations for filing claims for refund contained in Section 6511(a) of the Internal Revenue Code, 26 U.S.C. Sec. 6511(a).

C.

In granting the government's motions, the district court determined that the doctrine of recoupment does not permit a taxpayer to obtain a refund in an independent action after the statute of limitations for claiming a refund has expired. The court held that recoupment is "in the nature of a defense" that must be asserted in some action that has been timely commenced. As an alternative ground for dismissal, the district court found that the allocation of the settlement of the deficiency claim in the Tax Court could lead only to one conclusion--that the previously paid gift tax was taken into account in agreeing on the amount of income tax due. The court concluded that allocation of a small portion of the total agreed deficiency to the year in which the larger amount was received (1976) "was reflective of the tax already paid on that transfer, albeit a gift tax."

II.

On appeal the taxpayer argues that the district court misconstrued the requirement that recoupment be in the nature of a defense and thus erroneously concluded that this was an untimely independent action. She contends that recoupment is not required to be claimed as an actual defense to an action against the taxpayer, but only must be presented in the nature of a defense to a tax illegally collected. She maintains that her action is not barred, because her claim for refund was filed within three years after the IRS claimed a deficiency on the basis of a theory that was inconsistent with her earlier payment of a gift tax on the 1976 transfer. Thus, she asserts, her claim for recoupment was "in the nature of a defense."

The taxpayer also argues that the district court erred in its alternative basis of dismissal. She states that the allocation of the settlement does not give rise to the single inference that the agreeing parties took into account the gift tax previously paid on the 1976 transfer. She contends it is an equally valid inference that the smaller amount was allocated to 1976 to "sweeten the pot" for the taxpayer by reducing the total interest due under the settlement. The taxpayer argues that on this state of the record summary judgment was improper.

The government responds that equitable recoupment is a doctrine of limited application, and that the taxpayer is not within its reach. The government argues that the taxpayer in this case is attempting to use equitable recoupment offensively, rather than defensively. The government maintains that there are only two possible scenarios for the defensive presentation of a claim for recoupment. First, the "doctrine" may only support an independent action for refund of taxes when that action is not barred by the statute of limitations. Second, recoupment may accrue as an offset to the government's timely asserted deficiency determination. The government also argues that the plaintiff failed to demonstrate that she was subjected to double taxation on inconsistent theories, a condition precedent to the application of equitable recoupment. The proceedings in the Tax Court concerned income tax deficiencies for both 1976 and 1977. The taxpayer had paid a gift tax on the 1976 transfer only. It is clear, the government contends, that the allocation of the settlement satisfied the full income tax claimed for 1977, and took into account the previous payment of a gift tax for 1976.

III.

There is no statutory basis for permitting the recovery of a tax overpayment after the statute of limitations has expired. However, the Supreme Court has permitted such recoveries in limited circumstances under the doctrine of equitable recoupment. The first such case was Bull v. United States, 295 U.S. 247, 55 S.Ct. 695, 79 L.Ed. 1421 (1935). The taxpayer contends that Bull controls the present case and requires judgment in her favor. The government, on the other hand, relies on Rothensies v. Electric Storage Battery Co., 329 U.S. 296, 67 S.Ct. 271, 91 L.Ed. 296 (1946), which narrowed the application of equitable recoupment in tax cases. See Wood v. United States, 213 F.2d 660, 661 (2d Cir.1954) ("The gap in statutes of limitation created by the recoupment doctrine in tax cases seemed at one time to be fairly wide. But the gap has been narrowed markedly by McEachern v. Rose, 302 U.S. 56 [58 S.Ct. 84, 82 L.Ed. 46 (1937) ] ... and Rothensies v. Electric Storage Battery Co., 329 U.S. 296 [67 S.Ct. 271, 91 L.Ed. 296 (1946) ]").

A.

In Bull the Supreme Court permitted a decedent's estate to recover estate taxes paid in 1921 in a district court action filed in 1930, following rejection of a claim for refund filed in 1928. The decedent was a member of a partnership when he died in February 1920. The executor included the decedent's share of partnership profits from January 1, 1920, to the date of death as an asset of the estate in the estate tax return. The IRS determined in 1921 that the decedent's share of profits for the remainder of 1920 was also an estate asset, and the executor paid additional estate taxes on that amount. However, in 1925 the IRS concluded, during an audit, that the decedent's share of partnership profit for the February-December 1920 period was income to the estate. In July 1925 the IRS made a deficiency determination of income tax for 1920 with no deduction for the estate taxes previously paid on the value of the decedent's partnership interest.

The estate petitioned the Board of Tax Appeals (BTA) for a redetermination in September 1925. After the BTA upheld the deficiency...